Hedge funds benefit as euro falls

JulietChung

The euro's plunge has given a much-needed lift to hedge funds that have been repeatedly frustrated by the world's central banks.

A bevy of multibillion-dollar funds has gained as much as 9% this year as their managers bet against the euro, riding the European Central Bank's push to weaken the currency and bolster Europe's economy.

It has been "manna from heaven," said one hedge-fund manager, who made money last year shorting the euro, or betting the currency would lose value. He has steadily reduced his position and taken profits this year as the euro has continued to fall.

Bets against the euro helped Bridgewater Associates LP, the world's biggest hedge-fund firm, earn 7% in its Pure Alpha fund in the first two months of 2015, its strongest start in years, a person familiar with the firm said.

Some of the biggest winners have been the so-called macro funds that bet on broad economic developments, such as shifts in monetary policy, including Caxton Associates LP, Moore Capital Management LP and Tudor Investment Corp. Other funds not known for making big macro calls, such as the D.E. Shaw Group, also have profited from the currency's decline against the dollar.

It has been a difficult few years for macro managers and trend followers, who rely on complex automatic-trading strategies to profit and who have bemoaned that the markets are unusually calm and difficult to trade.

Many managers also misread broad changes and misplayed trades. One misfire: Investors widely bet that interest rates would rise last year, only to find U.S. bond prices were surprisingly resilient, pushing yields lower.

The euro wager has tested fund managers' patience. Some of them have been betting against the currency for as long as two years, though traders said more investors piled in or increased their wagers starting last summer, when the ECB said it would push a key interest rate into negative territory.

Bets against the euro have mounted rapidly in recent months. In the aggregate, investors have boosted their bearish euro bets in the futures market by 19% since the start of the year, according to data from the U.S. Commodity Futures Trading Commission that runs through March 10. While futures trading accounts for a small fraction of the foreign-exchange market, it is widely seen as a good proxy for how investors are positioned.

As of March 10, investors held a net 181,073 bearish bets, according to the CFTC. That compares with 152,219 at the end of 2014. Investors as a group were bullish on the euro as recently as May.

The ECB kicked off a vast bond-buying program last week, pushing the euro to a 12-year low against the dollar and boosting profits that began to trickle in at the end of last year. The euro ended Friday at $1.0497, down 13% since the end of 2014.

"It's very, very common for macro managers to be short the euro against the dollar," said Nicolas Rousselet, head of hedge funds at Swiss-based investment firm Unigestion. "It's a huge driver of macro fund returns."

The wager, in some ways, is more a bet on the dollar, with investors drawn to the prospect of higher interest rates in the U.S. as other central banks ease policies. Many funds that are betting against the euro also are shorting other currencies against the dollar, such as the Korean won and the Japanese yen.

But the euro bet is "probably the largest position for most macro managers at the moment," according to Tim Schuler, investment strategist at Permal Group, which oversees $22 billion in assets.

"You have all these divergent monetary policies where you have tightening in a few countries and easing in others, and that's creating a lot of potential for macro managers where that didn't exist after the crisis," said Greg Dowling of Cincinnati-based Fund Evaluation Group, which invests clients' money in hedge funds and has had exposure to the trade through several managers.

Some investors warn that betting on a strong dollar and weaker euro has become so popular that a surprise, such as the Fed deciding not to raise interest rates soon, could quickly lead to losses.

Some of the biggest hedge-fund players have benefited from the trade. The flagship fund of Brevan Howard Asset Management LLP, one of Europe's largest hedge-fund firms, with $27 billion under management, is up 2.7% this year.

Through Tuesday, the $8.5 billion Caxton Associates was up by about 7% in its main fund, according to an investor, with about 75% of the gains coming from currency bets. Its largest such trade is its bet against the euro and on the dollar, which the firm has had in place, in varying sizes, since the summer.

Louis Bacon's $14.8 billion Moore Capital was up 4.4% through February in its flagship fund, while the $13 billion Tudor Investment Corp., which had been short the euro against the dollar as early as May, was up 4.8% in its flagship fund through March 6, including 2.7% in the first week of March alone, investors said.

The $8.6 billion BlueTrend, the fund run by Leda Braga, a prominent manager, was up 9.1% through March 12, according to a person familiar with the firm, with bets against the euro and the yen helping to drive the gains. Man Group's $14.4 billion AHL strategy has also benefited from those trends; the AHL Diversified fund was up 6.3% through February.

"What we're really seeing here is currency markets are pricing in the repercussions of such divergent monetary policies," said Larry Kissko of Man AHL. "Those are big trends and we are capturing that."

Broker Newedge's Trend Indicator, a model portfolio that replicates the bets that computer-driven hedge funds may put on, has been short the euro for more than 280 days. The bet has been the single most profitable position in that portfolio this year.

D.E. Shaw's multistrategy Oculus fund was up more than 9% through February, according to people familiar with the matter. The $9 billion Eton Park Capital Management LP was up 4.8% through February, due in part to bets against the euro and the yen that have continued paying off in March, said a person familiar with the firm.

James Walker, chief operating officer at Solaise Capital Management LLP, which was up 4.6% in the first two months of the year, said currencies were the main driver of performance this month. The fund is up almost 3% this month. "Our positions on the euro have led the way," Mr. Walker said.

Still, for some clients of hedge funds, winnings from the trade are simply too late. Investors stampeded into macro strategies starting in 2010 after strong returns the previous two years, according to research firm HFR. After years of weak performance, though, investors have withdrawn more money from such funds than they have put in for each of the last eight quarters.

Rob Copeland contributed to this article.

Write to Juliet Chung at juliet.chung@wsj.com and Laurence Fletcher at laurence.fletcher@wsj.com

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